Study: Rural Workers Who Moved to Cities Mostly Ended Up in Low-Productivity Informal Jobs

A new study examining the productivity gap between farm and non-farm work in India has found that most agricultural labourers who moved to cities over the past 25 years were absorbed into informal, low-productivity jobs such as transport and restaurants, with little change either in the economy or in their own living standards.

The study, published in the Journal of Development Economics and written jointly by economists Rajveer Jat and Bharat Ramaswami, draws on data from the Reserve Bank of India's KLEMS (Capital, Labour, Energy, Materials and Services) dataset, covering the period from 1999 to 2024.

It estimates that between 63% and 75% of non-farm workers are employed in informal industries whose productivity is statistically indistinguishable from that of agriculture.

Once differences in labour share, human capital and hours worked are accounted for, the productivity gap between agriculture and the informal non-farm sector is small or negligible, the authors found.

By contrast, the formal non-farm sector is substantially more productive. Even after adjustments, its value added per worker is two to three times higher than that of agriculture, the study says. The large aggregate agricultural productivity gap is therefore driven primarily by the relatively small but economically dominant formal segment of the non-farm economy.

The paper argues that the real “structural dualism” in the Indian economy lies between the high-productivity formal sector and the low-productivity informal sector, which includes agriculture — not simply between farm and non-farm work.

On labour mobility, the study notes that movement between agriculture and the informal sector appears relatively unconstrained, with workers able to move freely between the two. Much of the uncorrected productivity gap between them arises from longer hours of employment in the informal sector. Even where the corrected gap is low, the seasonal nature of agricultural work gives workers a reason to migrate.

Speaking to The Hindu, Mr. Jat said the non-agriculture sector is typically more productive, and that labour moving out of agriculture into such work should raise overall living standards — a pattern seen in the development histories of many countries. That outcome, however, depends on whether workers actually reach productive sectors.

“We should move people more into those sectors instead of the restaurant sector or construction or any other non-agriculture activities which are not productive,” he said, pointing to fields such as information technology and financial services.

The main barriers to entering formal, higher-productivity work, he said, are the lack of formal education — particularly a college degree — and the lack of English-language education, which he described as a doorway to more productive sectors such as IT and financial services.

The authors suggest policy reforms, including the expansion of education and healthcare facilities, to help those who have moved out of agriculture and the rural economy find work in productive sectors around cities.

The findings temper a common assumption in development economics: that shifting workers out of agriculture automatically raises national productivity. In India's case, the study suggests, much of the shift has been from one low-productivity activity to another, with the gains concentrated in a formal segment that most migrants cannot easily enter.